Managing healthcare and retirement costs, already a concern for many people, is likely to become a major focus for people and families in the future. Over the past 10 years or more, the U.S. healthcare system has experienced a rate of inflation about 2.6 times higher than the rate of general economic inflation and this rate of increase is not expected to abate in the coming decade. Some of the factors contributing to rising healthcare expenses for people include, for example, greater cost-sharing between employers and workers with more costs borne by the workers, higher deductibles and co-payments, shift from co-pays to co-insurance, employers dropping coverage, reduced or eliminated retiree health benefits and high unemployment.
A HDHP is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. Individuals covered by a HDHP are generally eligible for a healthcare savings account, such as a health savings account (HSA) and/or a limited purpose flexible spending account (limited purpose FSA). A HSA is a tax-advantaged medical savings account available to taxpayers who are enrolled in a HDHP. The funds contributed to the HSA are not included in earned income, thus reducing income taxes. HSA funds can be invested as well. The earnings are not taxed and neither are the withdrawals if they are used to pay for qualified medical expenses. The funds in the HSA roll over and accumulate year to year if not spent. Thus, an HSA can also be a powerful means to save for healthcare expenses in retirement. A FSA is a tax-advantaged financial account that can be created through an employer. The account allows an employee to set aside a portion of earnings to pay for qualified expenses in the current tax year only. Money deducted from an employee's pay into a FSA is also not subject to payroll taxes. Unlike the HSA, funds not used by the end of the plan year in a FSA are generally lost to the employee. Generally, for employees not enrolled in a HDHP, the employees can use a FSA to pay for qualified medical expenses. For employees enrolled in a HDHP, the employees often has available a a limited purpose FSA to pay for qualified medical expenses, which may be limited to expenses related only to uncovered vision and/or uncovered dental, for example.
In view of rising healthcare costs, one of the greatest concerns for many people is that the increase in family healthcare expenses will reduce their ability to save for retirement, especially when wage growth is limited. For example, people may only be able to pay for today's healthcare by giving up tomorrow's retirement security.
As people increasingly save less for retirement because of rising healthcare costs, finding the right balance between covering health care expenses and saving for retirement will rise in importance. Additionally, as the majority of people begin to use HSAs and FSAs as part of their benefits, people will need help and guidance on how best to optimize their savings, for example with a HSA versus a 401(k), or a HSA and a 401(k). Further, people will need help determining how best to pay for out-of-pocket medical expenses in addition to optimizing their overall benefits spend and make the most of their company's benefits plans.
Additionally, many people miss out on greater savings opportunities by not reevaluating their savings dollars throughout the year. Rather most people attend to their health care and retirement benefits, as well as their other similar financial accounts, on a yearly basis or after a lifetime event. Traditionally people only change their plans, allocations and elections on an annual basis, or for qualified life events. No tool is available to enable participants to efficiently navigate the complexities of optimizing their saving abilities across various financial accounts throughout the year for situational changes.